Tuesday, January 25, 2011

John Mauldin-"The Unsustainable Meets the Irresistible"

I read John Mauldin's "Thoughts from the Frontline" investment and economic newsletter every week.  It is a free newsletter than you can subscribe to here.

You will not find individual investment recommendations from Mauldin.  He will provide you with sound economic insights as to the bigger picture so that you might make sense of where we are headed.

His article this week is entitled "The Unsustainable Meets the Irresistible" in which he covers a lot of the same ground as I have about our country's fiscal challenges in previous posts.   One chart that caught my eye in his newsletter was this one.

This shows pretty clearly that the only thing that got stimulated by all the federal spending over the last 3 years was federal employment.

The table below is also an "eye-opener" as it show the compounding effects that our expanding federal debt will have in combination with a return to any semblance of "normal" interest rates.  As bad as it seems, our situation is actually much worse than it appears due to the low interest rates that we are currently borrowing to finance our debt.  The Lindsey Group, who created the table, says we are in a fiscal trap due to the low rates.  I call it Fantasy Land.

Keep in mind that this table shows additional interest costs that we are not paying today in the range of $563 billion to $800 billion per year.    Where does that money come from?  You can see that even big tax increases and big spending cuts barely put a dent in the numbers.

Mauldin sums it up this way...

The takeaway is that we are on an unsustainable path. Absent something more serious even than what the Lindsey Group has outlined, long before we get to 2019 the bond markets will have taken away our ability to finance our debt at low rates.
Peter Orszag wrote a column in the Financial Times today. (Orszag was the Director of the Office of Management and Budget under President Obama.) His closing paragraph:
“The bottom line is that there may well be U.S. public debt tremors this year, both during federal debate over raising the debt ceiling and with at least a limited number of crises in local and city governments. The bigger problem, though, lies beyond 2011, as the unsustainability of the federal government’s fiscal trajectory becomes increasingly clear. I hope it does not ultimately require a crisis to restore fiscal sustainability at the federal level, but I fear it will.”

No comments:

Post a Comment